UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED September 30, 2016
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ____ TO ____.
 
COMMISSION FILE NUMBER: 0-31265
 
MABVAX THERAPEUTICS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
  
DELAWARE
 
93-0987903
(STATE OR OTHER JURISDICTION OF  INCORPORATION  OR ORGANIZATION)
 
(I.R.S. EMPLOYER IDENTIFICATION NO.)
 
11535 Sorrento Valley Road, Suite 400, San Diego, CA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
 
(858) 259-9405
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
☐  
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
 
The number of shares of common stock outstanding as of November 4, 2016 was 6,296,110.
 

 
 
 
 
 
Table of Contents
 
INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
1
 
 
 
 
 
 
2
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
 
5
 
 
 
 
 
23
 
 
 
 
 
29
 
 
 
 
 
29
 
 
 
 
 
 
 
 
 
 
 
30
 
 
 
 
 
30
 
 
 
 
 
30
 
 
 
 
 
30
 
 
 
 
 
30
 
 
 
 
 
30
 
 
 
 
 
31
 
 
 
 
32
 
 
-i-
 
 
PART 1. FINANCIAL INFORMATION
 
Item 1.        Financial Statements
 
MABVAX THERAPEUTICS HOLDINGS, INC.
Condensed Consolidated Balance Sheets
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
(Unaudited)
 
 
(Note 1)
 
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
     Cash and cash equivalents
 $6,941,213 
 $4,084,085 
     Grants receivable
   
  757,562 
     Prepaid expenses
  485,785 
  419,751 
     Other current assets
  10,000 
  47,586 
Total current assets
  7,436,998 
  5,308,984 
     Property and equipment, net
  665,588 
  135,486 
     Goodwill
  6,826,003 
  6,826,003 
     Other long-term assets
  168,597 
  126,654 
Total assets
 $15,097,186 
 $12,397,127 
Liabilities and Stockholders' Equity
    
    
Current liabilities:
    
    
     Accounts payable
 $608,374 
 $3,002,497 
     Accrued compensation
  640,192 
  562,755 
     Accrued clinical operations and site costs
  666,146 
  391,041 
     Accrued lease contingency fee
  590,504 
  590,504 
     License fee payable
   
  225,000 
     Other accrued expenses
  488,254 
  186,566 
     Interest payable
  49,229 
   
     Current portion of notes payable
  1,234,186 
   
     Current portion of capital leases payable
  16,654 
   
Total current liabilities
  4,293,539 
  4,958,363 
Long-term liabilities:
    
    
 Long-term portion of notes payable
  3,083,971 
   
     Long-term portion of capital leases
  72,498 
   
     Other long-term liabilities
  133,057 
   
Total long-term liabilities
  3,289,526 
   
 
    
    
Commitments and contingencies
    
    
 
    
    
Stockholders' equity:
    
    
     Series D convertible preferred stock, $0.01 par value, 1,000,000 shares authorized, 132,489 and 191,490 shares issued and outstanding, with a liquidation preference of $1,325 and $1,915 as of September 30, 2016, and December 31, 2015, respectively
  1,325 
  1,915 
     Series E convertible preferred stock, $0.01 par value, 100,000 shares authorized, 33,333 shares issued and outstanding with a liquidation preference of $333
  333 
  333 
    Series F convertible preferred stock, $0.01 par value, 1,559,252 shares authorized, 665,281 shares and none issued and outstanding, with a liquidation preference of $6,653 and none as of September 30, 2016 and December 31, 2015, respectively
  6,653 
   
    Common stock, $0.01 par value; 150,000,000 shares authorized, 6,296,110 and 3,836,631 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
  62,961 
  38,366 
    Additional paid-in capital
  80,595,120 
  67,999,928 
Accumulated deficit
  (73,152,271)
  (60,601,778)
Total stockholders' equity
  7,514,121 
  7,438,764 
Total liabilities and stockholders' equity
 $15,097,186 
 $12,397,127 
 
See Accompanying Notes to Condensed Consolidated Financial Statements
 
 
-1-
 
 
MABVAX THERAPEUTICS HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
     Grants
 $ 
 $133,318 
 $148,054 
 $509,474 
Total revenues
   
  133,318 
  148,054 
  509,474 
 
    
    
    
    
Operating costs and expenses:
    
    
    
    
     Research and development
  1,671,181 
  3,127,173 
  4,967,695 
  7,178,703 
     General and administrative
  2,420,516 
  2,286,315 
  7,001,521 
  7,473,416 
Total operating costs and expenses
  4,091,697 
  5,413,488 
  11,969,216 
  14,652,119 
Loss from operations
  (4,091,697)
  (5,280,170)
  (11,821,162)
  (14,142,645)
Interest and other expense, net
  (266,051)
  (84)
  (729,331)
  (269)
Change in fair value of warrant liability
   
   
   
  19,807 
Net loss
 $(4,357,748)
 $(5,280,254)
 $(12,550,493)
 $(14,123,107)
Deemed dividend on Series A-1 preferred stock
   
   
   
  (9,017,512)
Deemed dividend on Series A-1 warrant
   
   
   
  (179,411)
Deemed dividend on Series B preferred stock
   
   
   
  (8,655,998)
Accretion of preferred stock dividends
   
   
   
  (93,234)
Net loss allocable to common stockholders
 $(4,357,748)
 $(5,280,254)
 $(12,550,493)
 $(32,069,262)
Basic and diluted net loss per share
 $(0.86)
 $(1.51)
 $(2.87)
 $(13.96)
Shares used to calculate basic and diluted net loss per share
  5,041,408 
  3,486,318 
  4,374,801 
  2,297,496 
 
See Accompanying Notes to Condensed Consolidated Financial Statements
 
 
-2-
 
 
MABVAX THERAPEUTICS HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2016
(Unaudited)
 
 
 
Series D, E and F
Convertible Preferred Stock
 
 
Common Stock
 
 
Additional
Paid-in
 
 Accumulated
 
 
Total
Stockholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
  Capital
 
 Deficit 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
  224,823 
 $2,248 
  3,836,631 
 $38,366 
 $67,999,928 
 $(60,601,778)
 $7,438,764 
Issuance of warrants in connection with note payable transaction on January 15, 2016
   
   
   
   
  607,338 
   
  607,338 
Issuance of whole in lieu of fractional shares resulting from reverse split in August 2016
   
   
  2,426 
  24 
  (24)
   
   
Issuance of Series F convertible preferred stock, warrants and common stock in August public offering, net of $866,410 in issuance costs
  665,281 
  6,653 
  1,297,038 
  12,970 
  8,552,720 
   
  8,572,343 
Issuance of additional common stock related to April 2015 financing
   
   
  255,459 
  2,555 
  (2,555)
   
   
Stock issued for services
   
   
  35,644 
  356 
  163,644 
   
  164,000 
Conversion of Series D Preferred Stock to common stock
  (59,001)
  (590)
  797,312 
  7,974 
  (7,384)
   
   
Stock issued upon vesting of restricted stock units in April, July and August of 2016, net of payroll taxes
   
   
  71,600 
  716 
  (178,539)
   
  (177,823)
Stock-based compensation
   
   
   
   
  3,459,992 
   
  3,459,992 
Net loss
   
   
   
   
   
  (12,550,493)
  (12,550,493)
Balance at September 30, 2016
  831,103 
 $8,311 
  6,296,110 
 $62,961 
 $80,595,120 
 $(73,152,271)
 $7,514,121 
 
See Accompanying Notes to Condensed Consolidated Financial Statements
 
 
-3-
 
 
MABVAX THERAPEUTICS HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
For the Nine Months
Ended September 30,
 
 
 
2016
 
 
2015
 
Operating activities
 
 
 
 
 
 
Net loss
 $(12,550,493)
 $(14,123,107)
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
    
Depreciation and amortization
  60,058 
  15,412 
Stock-based compensation
  3,459,992 
  2,966,603 
Change in fair value of warrants
   
  (19,807)
Issuance of restricted common stock for services
  164,000 
  1,958,450 
Amortization and accretion related to notes payable
  337,151 
   
Increase (decrease) in operating assets and liabilities:
    
    
Grants receivable
  757,562 
  (48,974)
Other receivables
   
  2,275 
Prepaid expenses and other
  122,522 
  (191,619)
Accounts payable
  (2,476,130)
  749,258 
Accrued clinical operations and site costs
  275,105 
  (120,913)
Accrued compensation
  77,437 
  258,732 
Other accrued expenses
  150,487 
  636,358 
Net cash used in operating activities
  (9,622,309)
  (7,917,332)
Investing activities
    
    
Purchases of property and equipment
  (412,498)
  (68,279)
Net cash used in investing activities
  (412,498)
  (68,279)
Financing activities
    
    
Cash receipt from bank loan, net of financing costs
  4,610,324 
   
Issuances of common stock, preferred stock and warrants, net of issuance costs
  8,572,343 
  11,046,348 
Proceeds from exercise of stock options
   
  800 
Principal payments on short-term note
  (106,405)
   
Principal payments on capital lease
  (6,504)
   
Purchase of vested employee stock in connection with tax withholding obligation
  (177,823)
   
Net cash provided by financing activities
  12,891,935 
  11,047,148 
Net change in cash and cash equivalents
  2,857,128 
  3,061,537 
Cash and cash equivalents at beginning of period
  4,084,085 
  1,477,143 
Cash and cash equivalents at end of period
 $6,941,213 
 $4,538,680 
 
    
    
 
Supplemental disclosure:
 
    
Cash paid during the period for income taxes
 $24,626 
 $1,600 
 
Supplemental disclosures of non-cash investing and financing information:
 
    
Deemed dividend on beneficial conversion feature for preferred stock
 $ 
 $17,852,921 
Capital lease in connection with purchase of equipment
 $95,656 
 $ 
Purchases of property and equipment included in Accounts Payable
 $82,006
 
 $ 
Accretion of redemption value for Series A-1 and B convertible preferred stock
   
  93,234 
Conversion of Series A-1 redeemable preferred stock into common stock
 $ 
 $162,968 
Conversion of Series C preferred stock to common stock
 $ 
 $966 
Conversion of Series B preferred stock to common stock
 $ 
 $160,380 
Conversion of Series D preferred stock to common stock
 $7,974 
 $467 
Exchange of Series A-1 preferred stock and warrants into common stock and Series D convertible preferred stock
 $ 
 $13,111,280 
Exchange of Series B preferred stock and warrants into common stock and Series D convertible preferred stock
 $ 
 $10,451,784 
Fair value of warrants issued
 $607,338 
 $ 
Warrants exercised to purchase common stock on a cashless basis
 $ 
 $12,198 
Elimination of warrant liability in exchange transaction
 $ 
 $72,656 
Financing transaction costs not yet paid
 $2,500 
 $586,608 
 
See Accompanying Notes to Condensed Consolidated Financial Statements
 
 
-4-
 
 
MABVAX THERAPEUTICS HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
 
1. Basis of Presentation
 
We are a Delaware corporation, originally incorporated in 1988 under the name Terrapin Diagnostics, Inc. in the State of Delaware, and subsequently renamed “Telik, Inc.” in 1998, and thereafter renamed MabVax Therapeutics Holdings, Inc. (“MabVax Therapeutics Holdings”) in September 2014. Our principal corporate office is located at 11535 Sorrento Valley Road, Suite 400, San Diego, CA 92121 telephone: (858) 259-9405. On July 8, 2014, we consummated a merger (the “Merger”) with MabVax Therapeutics, Inc. (“MabVax Therapeutics”), pursuant to which our subsidiary Tacoma Acquisition Corp. merged with and into MabVax Therapeutics, with MabVax Therapeutics surviving as our wholly owned subsidiary. This transaction is referred to as the “Merger.”  Unless the context otherwise requires, references to “we,” “our,” “us,” or the “Company” in this Quarterly Report mean MabVax Therapeutics Holdings on a condensed consolidated financial statement basis with our wholly owned subsidiary following the Merger, MabVax Therapeutics, as applicable. Beginning October 10, 2014, our common stock was quoted on the OTCQB under the symbol “MBVX.” Since August 17, 2016, our common stock has been trading on The NASDAQ Capital Market under the symbol “MBVX.”
 
The balance sheet data at December 31, 2015, has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The consolidated financial statements as presented reflect certain reclassifications from previously issued financial statements to conform to the current year presentation.
 
On August 16, 2016, we filed a certificate of amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of our issued and outstanding common stock on a 1 for 7.4 basis, effective on August 16, 2016 (the “Reverse Stock Split”). The Reverse Stock Split was effective with The Financial Industry Regulatory Authority (FINRA) and the Company’s common stock began trading on The NASDAQ Capital Market at the open of business on August 17, 2016. All share and per share amounts, and number of shares of common stock into which each share of preferred stock will convert, in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the reverse split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.
 
The Company is a clinical stage biopharmaceutical company engaged in the discovery, development and commercialization of proprietary human monoclonal antibody products for the diagnosis and treatment of a variety of cancers. The Company has discovered a pipeline of human monoclonal antibody products based on the protective immune responses generated by patients who have been vaccinated against targeted cancers. The vaccines were discovered at Memorial Sloan Kettering Cancer Center (“MSK”) and are exclusively licensed to MabVax Therapeutics. The Company operates in only one business segment.
 
We have incurred net losses since inception and expect to incur substantial losses for the foreseeable future as we continue our research and development activities. To date, we have funded operations primarily through government grants, proceeds from the sale of common and preferred stock, the issuance of debt, the issuance of common stock in lieu of cash for services, payments from collaborators, and interest income. The process of developing products will require significant additional research and development, preclinical testing and clinical trials, as well as regulatory approvals. We expect these activities, together with general and administrative expenses, to result in substantial operating losses for the foreseeable future. We will not receive substantial revenue unless we or our collaborative partners complete clinical trials, obtain regulatory approvals and successfully commercialize one or more products; or we license our technology after achieving one or more milestones of interest to a potential partner.
 
 
-5-
 
 
The accompanying unaudited condensed consolidated financial statements were prepared using GAAP for interim financial information and the instructions to Regulation S-X. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results of the interim period, they do not include all information or notes required by GAAP for annual financial statements and should be read in conjunction with the Audited Financial Statements of MabVax Therapeutics Holdings for the year ended December 31, 2015 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2016.
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.
 
Recent Accounting Pronouncements
 
In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-2, "Leases (Topic 842)."  This update will increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged, and it simplified the accounting for sale and leaseback transactions. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of assessing what impact this new standard may have on our condensed consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payment transactions including accounting for excess tax benefits and tax deficiencies, classification of excess tax benefits in the statement of cash flows and accounting for award forfeitures. This update is effective for annual and interim reporting periods of public entities beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact of ASU 2016-09 on its consolidated financial statements.
 
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.
 
2. Liquidity and Going Concern
 
The accompanying condensed consolidated financial statements have been prepared on the going concern basis, which assumes that the Company will continue to operate as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $12,550,493, net cash used in operating activities of $9,622,309, net cash used in investing activities of $412,498, and net cash provided by financing activities of $12,891,935 for the nine months ended September 30, 2016. As of September 30, 2016, the Company had $6,941,213 in cash and cash equivalents and an accumulated deficit of $73,152,271.
 
 
-6-
 
 
On January 15, 2016, the Company and Oxford Finance, LLC, as collateral agent and lender, entered into a loan and security agreement (the “Loan Agreement”) providing for senior secured term loans to the Company in an aggregate principal amount of up to $10,000,000, subject to the terms and conditions set forth in the Loan Agreement (the “January 2016 Term Loan”).  On January 15, 2016, the Company received an initial loan of $5,000,000 under the Loan Agreement, before fees and issuance costs of approximately $390,000.
 
On August 22, 2016, we closed a public offering of 1,297,038 shares of common stock and 665,281 shares of Series F Preferred Stock, and warrants to purchase 1,962,319 shares of common stock at $5.55 per share and warrants to purchase 1,962,319 shares of common stock at $6.29 per share, at an offering price of $4.81 per share (the “August 2016 Public Offering”).  For every one share of common stock or Series F Preferred Stock sold, we issued one warrant to purchase one share of common stock at $5.55 per share and one warrant to purchase one share of common stock at $6.29 per share.  We received $9,438,753 in gross proceeds, before underwriting discounts and commissions and offering expenses totaling $866,410. The gross proceeds include the underwriters’ over-allotment option, which they exercised on the closing date.
 
We anticipate that the Company will continue to incur net losses into the foreseeable future as we: (i) continue our Phase I clinical trial for our standalone therapeutic HuMab 5b-1, designated as MVT-5873 that was initiated in the first quarter of 2016; (ii) continue our Positron Emission Tomography (“PET”) imaging agent 89Zr-HuMab-5B1, designated as MVT-2163 that was initiated in July 2016; (iii) prepare for filing with the Food and Drug Administration, or FDA, an Investigational New Drug, or IND, application for our HuMab-based radioimmunotherapy product, designated as MVT-1075; (iv) continue preclinical work on several other programs; and (iv) continue operations as a public company. After giving effect to the net proceeds received from the January 2016 Term Loan and the August 2016 Public Offering, management believes that the Company has sufficient funds to meet its obligations through May 2017. These conditions give rise to substantial doubt as to the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
We plan to continue to fund the Company’s losses from operations and capital funding needs through equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, we cannot be sure that such additional funds will be available on reasonable terms, or at all. If we are unable to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. In addition, if the Company does not meet its payment obligations to third parties as they come due, it may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. Any of these actions could materially harm the Company’s business, results of operations, and future prospects.
 
If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the Company’s ability to operate its business.
 
3. Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company limits its exposure to credit loss by holding cash in U.S. dollars, or, from time to time, placing cash and investments in U.S. government, agency and government-sponsored enterprise obligations.
 
4. Fair value of financial instruments
 
The Company’s financial instruments consist of cash and cash equivalents, grants receivable, prepaid expenses and other current assets and accounts payable, the carrying amount of which are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.
 
 
-7-
 
 
5. Convertible Preferred Stock, Common Stock and Warrants
 
MabVax Therapeutics Series B Preferred Stock and Warrants (Pre-Merger MabVax Therapeutics Issuances)
 
Due to the anti-dilution protection in our Series B warrants (described below), the Series B warrants were recorded as a current liability in the amount of $92,463 on the Company’s consolidated balance sheet as of December 31, 2014.  On March 25, 2015, the Series B warrants were re-valued at $72,656 prior to being exchanged into shares of common stock and Series D convertible preferred stock on a one for one basis, and the warrant liability was eliminated and the Company recorded a gain of $19,807 for the three months ended March 31, 2015.
 
Dividends on Preferred Stock
 
The Company immediately recognizes the changes in the redemption value on preferred stock as they occur, and the carrying value of the security is adjusted to equal what the redemption amount would be as if redemption were to occur at the end of the reporting date based on the conditions that exist as of that date. The value adjustment made to the Series B preferred stock redemption value and preferred stock dividends for the three months ended March 31, 2015, was an increase of $93,234, and was no longer outstanding after March 25, 2015.
 
Since the Company’s inception, no dividends were ever declared by the Company’s Board of Directors on either of the Company’s Series A redeemable convertible preferred stock or Series B redeemable convertible preferred stock.
 
Conversion of Preferred Stock into Common Stock
 
During the nine months ended September 30, 2015, holders of Series A-1, Series B, and Series C preferred stock converted 64,019, 106,437, and 96,571 shares into 5,197, 37,417, and 16,313 shares of common stock, respectively.
 
Exchange of Series A-1 and Series B Preferred Stock and Warrants into Common Stock and Series D Convertible Preferred Stock
 
On March 25, 2015, the Company entered into separate exchange agreements with certain holders of the Company’s Series A-1 preferred stock and warrants received in the Merger (the “Series A-1 Exchange Securities”) and holders of the Company’s Series B preferred stock and Series B warrants (the “Series B Exchange Securities” and, collectively with the Series A-1 Exchange Securities, the “Exchange Securities”), all previously issued by the Company, to eliminate the Exchange Securities. Pursuant to the exchange agreements, the holders exchanged the Exchange Securities and relinquished any and all other rights they may have had pursuant to the Exchange Securities, their respective governing agreements and certificates of designation, including any related registration rights, in exchange for an aggregate of 342,906 shares of the Company’s common stock and an aggregate of 238,156 shares of the Company’s newly designated Series D convertible preferred stock (the “Series D preferred stock”), convertible into 3,218,325 shares of common stock.  No cash was exchanged in the transaction.  The Company recorded deemed dividends of $9,017,512, $8,655,998 and $179,411 representing the excess fair value of the common stock issued over the original conversion terms of the Series A-1 and Series B preferred stock as part of the consideration for elimination of the Series A-1, Series B preferred stock and Series A-1 warrant, respectively. 
 
As of March 25, 2015, pursuant to the terms of the exchange agreements, the Series A-1 Purchase Agreement, dated February 12, 2014; the Series A-1 Registration Rights Agreement, dated February 12, 2014; the Series B Purchase Agreement, dated May 12, 2014; and the Series B Registration Rights Agreement, dated May 12, 2014; all of which have been described as part of the Company’s annual report on Form 10-K, were terminated, and all rights covenants, agreements and obligations contained therein, are of no further force or effect.
 
No commission or other payment was received by the Company in connection with the exchange agreements.
 
 
-8-
 
 
Series D Preferred Stock
 
As of September 30, 2016, there were 132,489 shares of Series D preferred stock issued and outstanding that are convertible into an aggregate of 1,790,392 shares of common stock, as compared to 191,490 that were convertible into 2,587,703 shares of common stock as of December 31, 2015.
 
As contemplated by the exchange agreements and as approved by the Company’s Board of Directors, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock (the “Series D Certificate of Designations”), on March 25, 2015. Pursuant to the Series D Certificate of Designations, the Company designated 1,000,000 shares of its blank check preferred stock as Series D preferred stock. Each share of Series D preferred stock has a stated value of $0.01 per share. In the event of a liquidation, dissolution or winding up of the Company, each share of Series D preferred stock will be entitled to a per share preferential payment equal to the stated value. Each share of Series D preferred stock is convertible into 13.5135 shares of common stock. The conversion ratio is subject to adjustment in the event of stock splits, stock dividends, combination of shares and similar recapitalization transactions. The Company is prohibited from effecting the conversion of the Series D preferred stock to the extent that, as a result of such conversion, the holder beneficially would own more than 4.99% (provided that certain investors elected to block their beneficial ownership initially at 2.49% in the exchange agreements), in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series D preferred stock. Each share of Series D preferred stock entitles the holder to vote on all matters voted on by holders of common stock. With respect to any such vote, each share of Series D preferred stock entitles the holder to cast such number of votes equal to the number of shares of common stock such shares of Series D preferred stock are convertible into at such time, but not in excess of the beneficial ownership limitations.
 
Series E Preferred Stock
 
As of September 30, 2016 and December 31, 2015, there were 33,333 shares of Series E preferred stock issued and outstanding, convertible into 519,751 and 450,446 shares of common stock, respectively.
 
On March 30, 2015, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock (the “Series E Certificate of Designations”) to designate 100,000 shares of its blank check preferred stock as Series E preferred stock.
 
The shares of Series E preferred stock are convertible into shares of common stock based on a conversion calculation equal to the stated value of such preferred share, plus all accrued and unpaid dividends, if any, on such share of Series E preferred stock, as of such date of determination, divided by the conversion price. The stated value of each share of Series E preferred stock is $75 and the initial conversion price is $5.55 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, during the period proscribed for in the Series E Certificate of Designations, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. The Company is prohibited from effecting a conversion of the share of Series E preferred stock to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series E preferred stock, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s share of Series E preferred stock, but not in excess of beneficial ownership limitations. The shares of Series E preferred stock bear no interest. 
 
On August 22, 2016, when the Company closed on the August 2016 Public Offering, the current Series E preferred stock conversion price of $5.55 per share was reduced to $4.81 per share under the terms of the Series E Certificate of Designations, resulting in an increase in the number of shares of common stock to 519,751 that the Series E preferred stock may be converted into. There is no further adjustment required by the Series E Certificate of Designations in the event of an offering of shares below $4.81 per share by the Company.
 
 
-9-
 
 
April 2015 Private Placement
 
On March 31, 2015, the Company consummated the first closing of a private offering (the “April 2015 Private Placement”) and sold $4,714,726 worth of units (the “Unit(s)”), net of $281,023 in issuance costs. The Units consisted of 900,136 shares of common stock and warrants to purchase 450,068 shares of common stock with an exercise price of $11.10 per share.  The Units were sold at a price of $5.55 per Unit.
 
On April 10, 2015, the Company consummated the second and final closing of the April 2015 Private Placement and sold $3,831,622 worth of Units, net of $387,127 in issuance costs, of which $2,500,000 of the Units consisted of Series E preferred stock and the balance of it consisting of 760,135 shares of common stock, together with warrants to all investors to purchase 605,293 shares of common stock at $11.10 per share.  Each Unit was sold at a purchase price of $5.55 per Unit.
 
The Company paid commissions to broker-dealers in the aggregate amount of approximately $574,000 in the April 2015 Private Placement.
 
OPKO Health, Inc., or OPKO, was the lead investor in the April 2015 Private Placement, purchasing $2,500,000 worth of Units consisting of Series E preferred stock.
 
As a condition to OPKO’s and Frost Gama Investment Trust’s, or FGIT’s, participation in the April 2015 Private Placement, each of the other investors in the April 2015 Private Placement agreed to execute lockup agreements restricting the sale of 50% of the securities underlying the Units purchased by them for a period of six months and the remaining 50% prior to the expiration of one year following the final closing date of the April 2015 Private Placement.
 
On April 10, 2015, the Company agreed that $3.5 million of the net proceeds of such closing would be paid into and held under the terms of an escrow agreement with Signature Bank, N.A. pending the approval of a representative of OPKO or 10 weeks thereafter, unless released sooner or extended by the Company and OPKO.  On June 22, 2015, the Company and OPKO extended the termination date of the escrow to 16 weeks from the final closing of the April 2015 Private Placement. In connection with the OPKO investment, Steven Rubin, Esq. was appointed advisor to the Company. The escrowed funds were to be returned to the applicable investors and the Company shall have no further obligation to issue Units to such investors in the event certain release conditions are not met. On June 30, 2015, the Company and OPKO entered into a letter agreement pursuant to which the Company granted the representative the right, but not the obligation, until June 30, 2016, to nominate and appoint up to two additional members of the Company’s Board of Directors, or to approve the person(s) nominated by the Company pursuant to the agreement in consideration for the release of the escrowed funds. The nominees will be subject to the satisfaction of standard corporate governance practices and any applicable national securities exchange requirements.  Upon signing the agreement, the escrowed funds were released to the Company.
 
The warrants are exercisable upon issuance and expire October 10, 2017, and may be exercised for cash or on a cashless basis. The warrants have a per share exercise price of $11.10, subject to certain adjustments including stock splits, dividends and reverse-splits. The Company is prohibited from effecting the exercise of the warrants to the extent that, as a result of such exercise, the holder beneficially would own more than 4.99% in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon the exercise of the warrants.
 
In connection with the April 2015 Private Placement, the Company also entered into registration rights agreements (the “Registration Rights Agreements”) with the investors in the April 2015 Private Placement pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of 25% of common stock issued pursuant to the subscription agreements including 25% of the common stock issuable upon conversion of the Series E preferred stock, in the event the investors elect to receive Series E preferred stock instead of common stock (together, the “Registrable Securities”), no later than 60 days following the final closing date of the April 2015 Private Placement, and to use its commercially reasonable best efforts to have such registration statement declared effective within 120 days after filing. Investors in the April 2015 Private Placement also may be required under certain circumstances to agree to refrain from selling securities underlying the purchased Units. The liquidated damages for failure to achieve effectiveness of the Registerable Securities is 1% per month beginning 120 days after filing, and provided management has not used commercially reasonable best efforts to have the registration statement declared effective within that time frame.
 
 
-10-
 
 
On June 9, 2015, the Company and investors holding over 60% of the outstanding Registrable Securities entered into an amendment agreement to the Registration Rights Agreements in order to extend the filing date of the registration statement to waive any payments that may be due to the investors as a result of the Company not filing a registration statement on or before the original filing date.  On August 4, 2015, the Company and investors holding over 70% of the outstanding Registrable Securities entered into a second amendment agreement to further extend the filing date to October 9, 2015.
 
On October 12, 2015, the Company and investors holding over 60% of the outstanding Registerable Securities entered into a third amendment agreement to the Registration Rights Agreements to suspend the Company’s registration obligations under the Registration Rights Agreements and related subscription agreements during any period when the “standstill” provision set forth in the subscription agreements is in effect. 
 
On January 28, 2016, the Company filed a Registration Statement on Form S-1, registering 527,680 shares of common stock for resale, including 112,613 shares of common stock, which are issuable upon conversion of the Company’s Series E preferred stock issued in the April 2015 Private Placement.
 
Except for certain issuances, for a period beginning on the closing date of the April 2015 Private Placement and ending on the date that is the earlier of (i) 24 months from the final closing date of the April 2015 Private Placement, (ii) the date the Company consummates a financing (excluding proceeds from the April 2015 Private Placement) in which the Company receives gross proceeds of at least $10,000,000 and (iii) the date the common stock is listed for trading on a national securities exchange (such period until the earlier date, the “Price Protection Period”), in the event that the Company issues any shares of common stock or securities convertible into common stock at a price per share or conversion price or exercise price per share that is less than $5.55, the Company shall issue to the investors in the April 2015 Private Placement such additional number of shares of common stock such that the investor shall own an aggregate total number of shares of common stock as if they had purchased the Units at the price of the lower price issuance. No adjustment in the warrants is required in connection with a lower price issuance.
 
 Effective with the Company’s entry into an agreement with the underwriter for the Company’s August 2016 Public Offering, which closed on August 22, 2016, the Company issued 255,459 shares of common stock to the holders of record of the shares purchased in the Company’s April 2015 Private Placement under the Price Protection Period, representing the shares the investors would have received had they purchased their shares at $4.81 per share, instead of $5.55 per share. Effective August 17, 2016, the date of listing of the Company’s stock on the Nasdaq Capital Market, the Price Protection Period came to an end.
 
The Company has also granted each investor a right of participation in the Company’s financings for a period of 24 months.
 
Between April 13, 2015, and April 14, 2015, certain holders of warrants issued in the April 2015 Private Placement to purchase an aggregate of 250,000 shares of common stock exercised such warrants on a cashless basis for an aggregate issuance of 164,835 shares of common stock. As of September 30, 2016, there were 805,361 warrants outstanding from the April 2015 Private Placement to purchase common stock at $11.10 per share.
 
October 2015 Public Offering
 
On October 5, 2015, the Company closed a public offering of 337,838 shares of common stock and warrants to purchase 168,919 shares of common stock, at an offering price of $8.14 per share.  For every two shares of common stock sold, the Company issued one warrant to purchase one share of common stock.  The Company received $2,750,000 in gross proceeds, before underwriting discounts and commissions and offering expenses totaling approximately $586,608, and without giving effect to any exercise of the underwriters’ over-allotment option.  The Company used the net proceeds from this offering to fund the HuMab-5B1 human antibody program preclinical development and for working capital and general corporate purposes.
 
The shares and warrants were separately issued and sold in equal proportions. The warrants are immediately exercisable, expire September 30, 2018, and have an exercise price of $9.77 per share.  The warrants are not listed on any securities exchange or other trading market.  As of September 30, 2016, there were warrants to purchase 168,919 shares of common stock outstanding. The Company granted the underwriters a 30-day option to purchase up to an additional 50,676 shares of common stock and up to an additional 25,338 warrants at the same price to cover over-allotments, if any.  
 
 
-11-
 
 
Under the terms of the underwriting agreement entered into between the Company and the underwriter in the public offering, the Company, without the prior written consent of the underwriter, was prohibited, for a period of 90 days after execution of the underwriting agreement, from issuing any equity securities, subject to certain exceptions.
 
August 2016 Public Offering
 
On August 22, 2016, we closed a public offering of 1,297,038 shares of common stock and 665,281 shares of Series F preferred stock, and warrants to purchase 1,962,319 shares of common stock at $5.55 per share and warrants to purchase 1,962,319 shares of common stock at $6.29 per share, at an offering price of $4.81 per share.  For every one share of common stock or Series F preferred stock sold, we issued one warrant to purchase one share of common stock at $5.55 per share and one warrant to purchase one share of common stock at $6.29 per share.  We received $9,438,753 in gross proceeds, before underwriting discounts and commissions and offering expenses totaling $866,410. The gross proceeds include the underwriter’s over-allotment option, which they exercised on the closing date.
 
On August 16, 2016, we filed a Certificate of Designations, Preferences and Rights of the 0% Series F Convertible Preferred Stock with the Delaware Secretary of State, designating 1,559,252 shares of preferred stock as 0% Series F convertible preferred stock.
 
The shares of Series F preferred stock are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series F preferred stock, plus all accrued and unpaid dividends, if any, on such Series F preferred stock, as of such date of determination, divided by the conversion price. The stated value of each share of Series F preferred stock is $4.81 and the initial conversion price is $4.81 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In the event of a liquidation, dissolution or winding up of the Company, each share of Series F preferred stock will be entitled to a per share preferential payment equal to the par value. All shares of the Company’s capital stock will be junior in rank to Series F preferred stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding-up of the Company, except for the Company’s Series D preferred stock and Series E preferred stock.
 
The holders of Series F preferred stock will be entitled to receive dividends if and when declared by our board of directors. The Series F preferred stock shall participate on an “as converted” basis, with all dividends declared on the Company’s common stock. In addition, if we grant, issue or sell any rights to purchase our securities pro rata to all our record holders of our common stock, each holder will be entitled to acquire such securities applicable to the granted purchase rights as if the holder had held the number of shares of common stock acquirable upon complete conversion of all Series F preferred stock then held.
 
We are prohibited from effecting a conversion of the Series F preferred stock to the extent that, as a result of such conversion, the holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series F preferred stock, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series F preferred stock, but not in excess of the beneficial ownership limitations.
 
Issuance of Common Stock under a 2014 Common Stock Purchase Agreement
 
In connection with a financing by the Company in July 2014 (the “July 2014 Financing Transaction”), the Company assumed certain obligations as per the original agreement to issue additional shares to investors in the July 2014 Financing Transaction if a subsequent financing or issuance of shares was at a price per share lower than the price per share in the July 2014 Financing Transaction. The Company issued on March 31, 2015, an aggregate of 11,904 shares of common stock that were required to be issued in connection with the July 2014 Financing Transaction as a result of the issuance of shares at a lower share price than in the July 2014 Financing Transaction.
 
 
-12-
 
 
Grant of Restricted Shares
 
Rubin Grant
 
On April 3, 2015, the Company entered into a consulting agreement with Steve Rubin pursuant to which he agreed to provide advisory services in connection with corporate strategy, licensing and business development estimated to be for a period of 12 months.  In exchange for his services, the Company provided him with a one-time grant of 27,027 shares of the Company’s restricted common stock, valued at $17.02 per share.  As the shares granted were fully vested upon grant and the Company has no legal recourse to recover the shares in the event of nonperformance, the Company recognized the grant date fair value of the shares as consulting expense upon grant during the second quarter of 2015.
 
Ravetch Grant
 
On April 4, 2015, the Board of Directors approved the issuance of an additional restricted stock award of 17,770 shares to Jeffrey Ravetch, M.D., Ph. D, who is one of the Company’s board members.  This award is for future services covering at least a one-year period. The award was granted in addition to the prior award to Dr. Ravetch on April 2, 2015 of (i) 4,628 restricted shares and (ii) options to purchase 4,628 shares of common stock with an exercise price of $17.02 per share, for a total grant of 27,028 restricted shares and options. As the 17,770 shares granted were fully vested upon grant and the Company has no legal recourse to recover the shares in the event of nonperformance, the Company recognized the grant date fair value of the shares as consulting expense upon grant during the second quarter of 2015.
 
 Livingston Grant
 
On April 4, 2015, the Board of Directors approved the issuance of a restricted stock award by the Company of 135,135 shares of common stock, valued at $17.02 per share, to Philip Livingston, Ph.D. for his continuing service to the Company.  On May 13, 2015, the Compensation Committee of the Board of Directors clarified that the award was being granted in consideration for at least one year of Dr. Livingston’s services.  The committee further clarified that the vesting of the common stock shall be on the one-year anniversary of the Board of Directors’ approval of the award, or April 4, 2016.  The Company expensed the grant date fair value of the award over the vesting period of one year.
 
Consulting Agreements
 
On April 5, 2015, the Company entered into a consulting agreements with two investor relations consultants to provide relations services to the Company in consideration for an immediate grant of 40,541 shares of the Company’s restricted common stock and a monthly cash retainer of $12,000 a month for ongoing services for a period of one year. The consultants also received an additional 27,027 shares of the Company’s restricted common stock upon the Company’s achieving a milestone based on its fully-diluted market capitalization. As the shares granted were fully vested upon grant and the Company has no legal recourse to recover the shares in the event of nonperformance, the Company recognized the grant date fair value of the 40,541 shares or $690,000, as investor relations expense upon grant during the second quarter of 2015. The performance condition for the 27,027 shares became probable and the market capitalization metric was met during the second quarter; therefore, the Company recognized an additional $460,000 of expense during the quarter ended June 30, 2015.
 
Also during 2015, the Board of Directors approved the issuance of restricted stock awards to two other consultants totaling 16,217 shares with vesting terms ranging from one to three years, valued from $13.10 to $15.76 per share.  The Company is expensing each of the grant date fair value of the awards over the performance period for the award, which will be re-measured at the end of each quarter until the performance is complete. As of September 30, 2016, the Company expensed $33,124 related to these grants. As of September 30, 2016, the expected future compensation expense related to these grants is $35,636 based upon the Company’s stock price on September 30, 2016.
 
On January 13, 2016, the Board of Directors approved the issuance of 13,514 shares of restricted stock valued at $64,000 to a consultant for advisory services to the Company.
 
 
-13-
 
 
On September 1, 2016, the Board of Directors approved the issuance of 22,130 shares of common stock with a date of issuance fair value of $100,000 to another investor relations consulting firm. In exchange for the shares granted and a monthly retainer, the consulting firm will perform investor relation services on behalf of the Company. As the shares granted were fully vested upon grant and the Company has no legal recourse to recover the shares in the event of nonperformance, the Company recognized the grant date fair value of the 22,130 shares of $100,000 as investor relations expense upon grant during the third quarter of 2016.
 
6. Notes Payable
 
On January 15, 2016, we entered into a loan and security agreement with Oxford Finance, LLC pursuant to which we had the option to borrow $10,000,000 in two equal tranches of $5,000,000 each (the “Loan Agreement”).  The first tranche of $5,000,000 was funded at close on January 15, 2016 (the “Term A Loan”). The option to fund the second tranche of $5,000,000 (the “Term B Loan”) was upon the Company achieving positive interim data on the Phase 1 HuMab-5B1 antibody trial in pancreatic cancer and successfully uplisting to either the NASDAQ Stock Market or NYSE MKT on or before September 30, 2016.  The option for the Term B Loan expired on September 30, 2016. The Company is not pursuing completion of any additional debt financing with Oxford Finance, LLC at the present time. The interest rate for the Term A Loan is set on a monthly basis at the index rate plus 11.29%, where the index rate is the greater of the 30-day LIBOR rate or 0.21%.  Interest is due on the first day of each month, in arrears, calculated based on a 360-day year.  The loan is interest only for the first year after funding, and the principal amount of the loan is amortized in equal principal payments, plus period interest, over the next 36 months.  A facility fee of 1.0% or $100,000 was due at closing of the transaction, and was earned and paid by the Company on January 15, 2016.  The Company is obligated to pay a $150,000 final payment upon completion of the term of the loan, and this amount is being accreted using the effective interest rate method over the term of the loan. Each of the term loans can be prepaid subject to a graduated prepayment fee, depending on the timing of the prepayment.
 
Concurrent with the closing of the transaction, the Company issued 225,226 common stock purchase warrants to Oxford Finance, LLC with an exercise price of $5.55 per share.  The warrants are exercisable for five years and may be exercised on a cashless basis, and expire on January 15, 2021. The Company recorded $607,338 for the fair value of the warrants as a debt discount within notes payable and an increase to additional paid-in capital on the Company’s balance sheet. We used the Black-Scholes-Merton valuation method to calculate the value of the warrants. The debt discount is being amortized as interest expense over the term of the loan using the effective interest method.
 
We granted Oxford Finance, LLC a perfected first priority lien on all of the Company’s assets with a negative pledge on intellectual property. The Company paid Oxford Finance, LLC a good faith deposit of $50,000, which was applied towards the facility fee at closing.  The Company agreed to pay all costs, fees and expenses incurred by Oxford Finance, LLC in the initiation and administration of the facilities including the cost of loan documentation.
 
At the initial funding, the Company received net proceeds of approximately $4,610,000 after fees and expenses. These fees and expenses are being accounted for as a debt discount and classified within notes payable on the Company’s condensed consolidated balance sheet. The Company's transaction costs of approximately $390,000 are presented in the condensed consolidated balance sheet as a direct deduction from the carrying amount of the notes payable, consistent with debt discounts. Debt discounts, issuance costs and the final payment are being amortized or accreted as interest expense over the term of the loan using the effective interest method.
 
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failure to fulfill certain of the Company's obligations under the Loan Agreement, the occurrence of a material adverse change, which is defined as a material adverse change in the Company's business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of the Lenders’ lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, the Lenders would be entitled to exercise their remedies thereunder, including the right to accelerate payment of the debt, upon which we may be required to repay all amounts then outstanding under the Loan Agreement, which could harm the Company's financial condition.
 
 
-14-
 
 
The Company was in compliance with all applicable covenants set forth in the Loan Agreement as of September 30, 2016.
 
The Company recorded interest expense related to the term loan of $266,057 and $729,350 for the three and nine months ended September 30, 2016, respectively. The annual effective interest rate on the note payable, including the amortization of the debt discounts and accretion of the final payment, but excluding the warrant amortization, is approximately 13.8%.
 
As of September 30, 2016, the Company has one insurance premium note outstanding with a balance totaling $123,075, which matures in April 2017.  This note bears interest at a rate of 4.5% per annum, and the monthly payments are $20,783.
 
Future principal payments under the Loan Agreement and insurance premium note as of September 30, 2016 are as follows:
 
Years ending December 31:
 
 
 
2016
 $61,192 
2017
  1,589,660 
2018
  1,666,667 
2019
  1,666,667 
2020
  138,889 
Notes payable, balance as of September 30, 2016
  5,123,075 
Unamortized discount on notes payable
  (804,918)
Notes payable, net, balance as of September 30, 2016
  4,318,157 
Current portion of notes payable
  (1,234,186)
Non-current portion of notes payable
 $3,083,971 
 
7. Related Party Transactions
 
On April 1, 2016, the Company entered into a two-year consulting agreement with Jeffrey Ravetch, M.D., Ph.D., a Board member, for work beginning January 1, 2016 through December 31, 2017, at a rate of $100,000 a year, in support of scientific and technical advice on the discovery and development of technology and products for the Company primarily related to monoclonal antibodies, corporate development, and corporate partnering efforts.  In April 2016, the Company paid Dr. Ravetch $100,000 for services to be performed in 2016, and will pay quarterly thereafter beginning January 1, 2017.
 
In April 2015, the Company granted a restricted stock award of 135,135 shares to Phil Livingston, Ph.D., an employee and member of the Board of Directors, for his continuing services to the Company, and the value of this award has been amortized over a period of one year. 
 
 
-15-
 
 
8. Stock-based Activity
 
Amendment of Equity Incentive Plan
 
On March 31, 2015, the Company approved a Second Amended and Restated 2014 Employee, Director and Consultant Equity Incentive Plan (the “Plan”) to increase the number of shares reserved for issuance under the Plan from 21,362 to 1,129,837 shares of common stock. Additional changes to the Plan include:
 
 
An “evergreen” provision to reserve additional shares for issuance under the Plan on an annual basis commencing on the first day of fiscal 2016 and ending on the second day of fiscal 2024, such that the number of shares that may be issued under the Plan shall be increased by an amount equal to the lesser of: (i) 1,081,081 or the equivalent of such number of shares after the administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with the Plan; (ii) the number of shares necessary such that the total shares reserved under the Plan equals (x) 15% of the number of outstanding shares of common stock on such date (assuming the conversion of all outstanding shares of Preferred Stock (as defined in the Plan) and other outstanding convertible securities and exercise of all outstanding warrants to purchase common stock) plus (y) 30,946; and (iii) an amount determined by the Board.
 
 
 
 
Provisions that no more than 405,406 shares may be granted to any participant in any fiscal year.
 
 
 
 
Provisions to allow for performance based equity awards to be issued by the Company in accordance with Section 162(m) of the Internal Revenue Code.
 
 
 
 
 
On September 22, 2016, the Board of Directors ratified an automatic increase in the number of shares reserved for issuance under the Plan, increasing the total shares reserved from 1,129,837 to 1,208,307 shares of common stock, under the annual evergreen provision for the Plan.
 
Stock-based Compensation
 
We measure stock-based compensation expense for equity-classified awards, principally related to stock options and restricted stock units, or RSUs, based on the estimated fair values of the awards on the date of grant. We recognize the value of the portion of the award that we ultimately expect to vest as stock-based compensation expense over the requisite service period in our condensed consolidated statements of operations. Due to limited activity in 2016 and 2015, we assumed a forfeiture rate of zero.
 
We use the Black-Scholes-Merton model to estimate the fair value of stock options granted. The expected term of stock options granted represents the period of time that we expect them to be outstanding.  For the three and nine months ended September 30, 2016 we used volatility of 70.98% to 85.91%, dividend rate of 0%, expected term of 2.9 to 6 years, and risk-free interest rate of 0.87% to 1.43% in our Black-Scholes-Merton calculations. For the three and nine months ended September 30, 2015, we used volatility of 81.03% to 86.62%, dividend rate of 0%, expected term of 5.5 to 6 years, and risk-free interest rate of 0.87% to 1.05% in our Black-Scholes-Merton calculations.
 
Total estimated stock-based compensation expense, related to all of the Company’s stock-based payment awards recognized under ASC 718, “Compensation—Stock Compensation” and ASC 505, “Equity” comprised the following:
 
 
Three Months
Ended
 
 
 
Three Months
Ended
 
 
Nine Months
Ended
 
 
Nine Months
Ended
 
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Research and development
 $301,985 
 $307,892 
 $889,666 
 $633,593 
General and administrative
  666,556 
  1,186,931 
  2,570,326 
  2,333,010 
Total stock-based compensation expense
 $968,541 
 $1,494,823 
 $3,459,992 
 $2,966,603 
 
 
-16-
 
 
Stock-based Award Activity
 
The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2016:
 
 
 
Options
Outstanding
 
 
Weighted-Average Exercise Price
 
Outstanding at December 31, 2015
  438,249 
 $17.46 
Granted
  413,578 
  5.21 
Exercised
   
   
Forfeited/cancelled/expired
  (36,415)
  15.28 
Outstanding and expected to vest at September 30, 2016
  815,412 
  11.32 
Vested and exercisable at September 30, 2016
  164,588 
 $17.58 
 
The total unrecognized compensation cost related to nonvested stock option grants as of September 30, 2016, was $3,496,364, and the weighted average period over which these grants are expected to vest is 2.18 years. The Company has assumed a forfeiture rate of zero. The weighted average remaining contractual life of stock options outstanding at September 30, 2016, is 9.0 years.
 
During the first nine months of 2016, the Company granted 413,578 options to officers and employees with a weighted average exercise price of $5.21 and vesting over a three-year period with vesting starting at the one-year anniversary of the grant date.  During the first nine months of 2015, there were 407,547 options and 310,926 shares of restricted stock granted to directors, officers, employees and consultants.  
 
Because the Company had a net operating loss carryforward as of September 30, 2016, no tax benefits for the tax deductions related to stock-based compensation expense were recognized in the Company’s condensed consolidated statements of operations. Additionally, there were no stock options exercised in the three and nine months ended September 30, 2016 and there were 376 stock options exercised during the three and nine months ended September 30, 2015.
 
A summary of activity related to restricted stock grants under the Plan for the nine months ended September 30, 2016 is presented below:
 
 
 
Shares
 
 
Weighted-Average Grant-Date Fair Value
 
Nonvested at December 31, 2015
  310,926 
 $16.84 
Granted
   
   
Vested
  (105,448)
  18.82 
Forfeited
   
   
Nonvested at September 30, 2015
  205,478 
  16.85 
 
As of September 30, 2016, unamortized compensation expense related to restricted stock grants amounted to $2,553,920, which is expected to be recognized over a weighted average period of 1.5 years. 
 
Management Bonus Plan
 
On April 2, 2015, the Compensation Committee of the Board of Directors approved the 2015 Management Bonus Plan (the “Management Plan”) outlining maximum target bonuses of the base salaries of certain of the Company’s executive officers.  Under the terms of the Management Plan, the Company’s Chief Executive Officer shall receive a maximum target bonus of up to 50% of his annual base salary, the Chief Financial Officer shall receive a maximum target bonus of up to 35% of his annual base salary and the Company’s Vice President shall receive a maximum target bonus of up to 25% of his annual base salary.
 
 
-17-
 
 
On April 4, 2015, the Board approved the following Non-Employee Director Policy (the “Incumbent Director Policy”) with respect to incumbent non-employee members of the Board in the event that they are replaced before their term expires:
 
 
a one-time issuance of 2,703 restricted shares of common stock;
 
 
the vesting of all options and restricted stock grants held on such date; and
 
 
the payment of all earned but unpaid cash compensation for their services on the Board and its committees, as of such date.
 
On April 4, 2015, in connection with his resignation from the Board of Directors, Michael Wick received a one-time restricted stock grant of 2,703 shares under the Incumbent Director Policy.
 
On February 16, 2016, our Compensation Committee approved a 2016 Management Bonus Plan (the “2016 Management Plan”) outlining maximum target bonuses of the base salaries of certain of our executive officers. Under the terms of the 2016 Management Plan, the Company's Chief Executive Officer shall receive a maximum target bonus of up to 50% of his annual base salary, and the Chief Financial Officer and each of the Company's Vice Presidents shall receive a maximum target bonus of up to 30% of their annual base salary.
 
Stock Issued Upon Vesting of Restricted Stock Grants
 
On April 2 and April 3, 2016, 98,237 shares of restricted stock units vested upon the one-year anniversary of restricted stock units granted.  Accordingly, 64,392 shares were issued to the Company’s directors and officers, and the Company withheld 33,845 shares for the employee portion of taxes and remitted $177,823 to the tax authorities in order to satisfy tax liabilities related to this issuance on behalf of the officers.  In addition, in July and August of 2016, 7,208 shares were issued to outside consultants upon vesting of previously issued restricted stock units. As of September 30, 2016, there were 205,478 nonvested restricted stock units remaining outstanding.
 
Common Stock Reserved for Future Issuance
 
Common stock reserved for future issuance consists of the following at September 30, 2016:
 
Common stock reserved for conversion of preferred stock
  2,975,424 
Common stock reserved for exercise of warrants
  5,124,144 
Common stock options outstanding
  815,412 
Authorized for future grant or issuance under the Stock Plan
  22,443 
Nonvested restricted stock
  205,478 
Total
  9,142,901 
 
9. Net Loss per Share
 
The Company calculates basic and diluted net loss per share using the weighted-average number of shares of common stock outstanding during the period.
 
When the Company is in a net loss position, it excludes from the calculation of diluted net loss per share all potentially dilutive stock options, preferred stock and warrants, and the diluted net loss per share is the same as the basic net loss per share for such periods. If the Company was to be in a net income position, the weighted average number of shares used to calculate the diluted net income per share would include the potential dilutive effect of in-the-money securities, as determined using the treasury stock method.
 
 
-18-
 
 
The table below presents the potentially dilutive securities that would have been included in the calculation of diluted net loss per share if they were not antidilutive for the periods presented.
 
 
 
As of September 30,
 
 
 
2016
 
 
2015
 
Stock options
  815,412 
  438,249 
Restricted stock awards 
  205,478 
  610,926 
Preferred stock
  2,975,424 
  3,038,162 
Common stock warrants
  5,124,144 
  805,361 
Total
  9,120,458 
  4,892,698 
 
10. Contracts and Agreements
 
Memorial Sloan Kettering Cancer Center, or MSK
 
Since 2008 the Company has engaged in various research agreements and collaborations with MSK including licensed rights to cancer vaccines and the blood samples from patients who have been vaccinated with MSK’s cancer vaccines. Total sponsored research contracts outstanding in 2016 amounting to approximately $800,000 in 2016 were approximately 89% complete as of September 30, 2016. Such sponsored research agreements provide support for preclinical work on the Company’s product development programs. The work includes preparing radioimmunoconjugates of the Company’s antibodies and performing in vitro and in vivo pharmacology studies for our therapeutic antibody product, imaging agent product and radioimmunotherapy product programs.
 
Life Technologies Licensing Agreement
 
On September 24, 2015, the Company entered into a licensing agreement with Life Technologies Corporation, a subsidiary of ThermoFisher Scientific.  Under the agreement the Company agreed to license certain cell lines from Life Technologies Corporation to be used in the production of recombinant proteins for the Company’s clinical trials.  The amount of the contract is for $450,000 and was fully expensed during 2015.  The Company paid $225,000 during 2015 related to this contract, and the remaining amount of $225,000 was paid during the quarter ended September 30, 2016.
 
Rockefeller University Collaboration
 
In July 2015, the Company entered into a research collaboration agreement with Rockefeller University's Laboratory of Molecular Genetics and Immunology. The Company provided antibody material to Rockefeller University, which is exploring the mechanism of action of constant region (Fc) variants of the HuMab 5B1 in the role of tumor clearance. The Company will supply additional research materials as requested by the university, which is evaluating ways to optimize the function.
 
Juno Option Agreement
 
On August 29, 2014, the Company entered into an option agreement (the “Option Agreement”) with Juno Therapeutics, Inc. (“Juno”) in exchange for a one-time up-front option fee in the low five figures. Pursuant to the Option Agreement, the Company granted Juno the option to obtain an exclusive, world-wide, royalty-bearing license authorizing Juno to develop, make, have made, use, import, have imported, sell, have sold, offer for sale and otherwise exploit certain patents the Company developed with respect to fully human antibodies with binding specificity against human GD2 or sialyl-Lewis A antigens and certain Company controlled biologic materials. As of June 30, 2016, the Option Agreement expired and Juno no longer has a contractual right for use of Company binding domains for use in the construction of CAR T-cells. During the three and nine months ended September 30, 2016, no revenues had been earned under the Option Agreement.
  
 
-19-
 
 
Patheon Biologics LLC Agreement
 
              On April 14, 2014, the Company entered into a development and manufacturing services agreement (the “Services Agreement”) with Patheon (f.k.a. Gallus Biopharmaceuticals) to provide a full range of manufacturing and bioprocessing services, including cell line development, process development, protein production, cell culture, protein purification, bio-analytical chemistry and quality control, or QC, testing.  Total amount of the contract is estimated at approximately $3.0 million.  For the three and nine months ended September 30, 2016, the Company had no additional expenses associated with the agreement.  The company recorded no expenses related to this Services Agreement in 2016. For the three and nine months ended September 30, 2015, the Company recorded $751,931 and $1,987,006 of expense, respectively, associated with the Services Agreement. During the third quarter of 2016, the Company negotiated a reduction in the amount previously recorded and owed to Patheon related to manufacturing batches that have failed, resulting in the reduction in R&D expenses of approximately $363,000 during the quarter.
 
NCI PET Imaging Agent Grant
 
In September 2013, the National Cancer Institute (“NCI”) awarded the Company a Small Business Innovation Research, or SBIR, Program Contract to support the Company’s program to develop a Positron Emission Tomography (“PET”) imaging agent for pancreatic cancer using a fragment of the Company’s 5B1 antibody (the “NCI PET Imaging Agent Grant”). The project period for Phase I of the grant award of approximately $250,000 covered a nine-month period which commenced in September 2013 and ended in June 2014.
 
On August 25, 2014, the Company was awarded a $1.5 million contract for the Phase II portion of the NCI PET Imaging Agent Grant. The contract was intended to support a major portion of the preclinical work being conducted by the Company, together with its collaboration partner, MSK, to develop a novel PET imaging agent for detection and assessment of pancreatic cancer. The total contract amount for Phase I and Phase II of approximately $1,749,000 supports research work through June 2016.  The contract has been successfully completed at the end of 2015.  No additional activities are required or planned under the contract and all monies available under the contract have been requested and received.
 
The Company records revenue associated with the NCI PET Imaging Agent Grant as the related costs and expenses are incurred. For the three and nine months ended September 30, 2016 and 2015, the Company recorded none, $148,054, $133,318 and $509,474 of revenue associated with the NCI PET Imaging Agent Grant, respectively.
 
11. Commitments and contingencies
 
Litigation
 
On September 18, 2015, an Order and Final Judgment was entered by the Superior Court of the State of California, approving a settlement of a class action lawsuit commenced on May 30, 2014, in Santa Clara County Superior Court, State of California, on behalf of Cadillac Partners and others similarly situated, naming as defendants, MabVax Therapeutics, the Company and the Company’s directors, Hudson Bay Capital Management LP, Bio IP Ventures LLC, Hudson Bay Master Fund Ltd., and Hudson Bay IP Opportunities Master Fund LP, together the “Parties,” alleging the defendants breached certain fiduciary duties, or aided and abetted a breach of fiduciary duties, in connection with the Company’s Merger with MabVax Therapeutics. The plaintiff sought to enjoin the Merger and obtain damages as well as attorneys’ and expert fees and costs.  We expect to incur no expenses in 2016 or thereafter in connection with this lawsuit or settlement.
 
Operating Leases
 
In connection with the Merger, the Company recorded a $590,504 contingent lease termination fee, in connection with the termination by MabVax Therapeutics Holdings (f.k.a. Telik, Inc.) of the master lease and sublease of our facility located at 3165 Porter Drive in Palo Alto, California (the “Porter Drive Facility”), which is payable to ARE-San Francisco No. 24 (“ARE”) following the Company’s receipt of $15 million or more in additional financing, in the aggregate, which was achieved on August 22 ,2016.
 
 
-20-
 
 
On September 2, 2015, the Company entered into a lease (the “Lease”) with AGP Sorrento Business Complex, L.P., for certain premises of office and laboratory space in buildings located at 11535 Sorrento Valley Rd., San Diego, California, to serve as the Company’s corporate offices and laboratories (the “New Premises”).  Due to the fact that certain tenant improvements needed to be made to the New Premises before the Company could take occupancy, the term of the Lease did not commence until the New Premises were ready for occupancy, which was on February 4, 2016.  The Lease terminates six years after such term commencement date, unless earlier terminated in accordance with the Lease. Pursuant to the terms of the Lease, the monthly base rent is $35,631, subject to annual increases as set forth in the Lease.
 
The Company has an option to extend the Lease term for a single, five-year period.  If the Lease term is extended for the optional five-year period, the monthly base rent will be adjusted based on fair market rental value.  In addition to rent, the Company agreed to pay a portion of the taxes and utility, maintenance and other operating costs paid or accrued in connection with the ownership and operation of the property.
 
The Company previously leased its corporate office and laboratory space under an operating lease that, as amended on August 1, 2010, expired on July 31, 2015. The lease contained an option to cancel at various dates prior to the termination date by paying a cancellation penalty. The Company has provided a refundable security deposit of $11,017 to secure its obligations under the lease, which was included in other long-term assets in the accompanying condensed consolidated financial statements. We recognize rent expense on a straight-line basis over the term the lease.
 
During the three and nine months ended September 30, 2016, the Company recorded rent expense of $115,238 and $318,159, respectively, and during the three and nine months ended September 30, 2015, the Company recorded rent expense of $31,627 and $89,156, respectively. 
 
Minimum future annual operating lease obligations are as follows as of September 30, 2016:
 
2016 (remaining)
 $106,893 
2017
  439,330 
2018
  452,510 
2019
  466,085 
2020
  480,068 
Thereafter
  535,776 
Total
 $2,480,662 
 
Capitalized Leases
 
On March 21, 2016, the Company entered into a lease agreement with ThermoFisher Scientific (“Lessor”).  Under the terms of the agreement, the Company agreed to lease two pieces of equipment from the Lessor, a liquid chromatography system and an incubator, totaling in cost of $95,656.  The term of the lease is five years (60 months), and the monthly lease payment is $1,942. In addition, there is a $1.00 buyout option at the end of the lease term.
 
 
-21-
 
 
As of September 30, 2016, future minimum lease payments due in fiscal years under capitalized leases are as follows: 
 
2016 (remainder of)
 $5,826 
2017
  23,306 
2018
  23,306 
2019
  23,306 
2020
  23,306 
2021 and thereafter
  7,904 
Less interest
  (17,802)
Principal
  89,152 
Less current portion
  (16,654)
Noncurrent portion
 $72,498 
 
 
 
-22-
 
 
Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD LOOKING STATEMENTS
 
The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as “plan,” “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future and thus you should not unduly rely on these statements.
 
The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K as of and for the year ended December 31, 2015, Part II-Section 1A herein, and other periodic reports filed with the United States Securities and Exchange Commission (“SEC”). Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements and thus you should not unduly rely on these statements.
 
Overview
 
We have been engaged in the discovery and development of proprietary human monoclonal antibody products for the diagnosis and treatment of a variety of cancers. We have discovered a pipeline of human monoclonal antibody products based on the protective immune responses generated by patients who have been immunized against targeted cancers. Therapeutic vaccines under development were discovered at Memorial Sloan Kettering Cancer Center, or MSK, and are exclusively licensed to MabVax Therapeutics. We operate in only one business segment. We have incurred substantial losses since inception, and we expect to incur additional substantial losses for the foreseeable future as we continue our research and development activities. To date, we have funded our operations primarily through government grants, proceeds from the sale of common and preferred stock, the issuance of debt, the issuance of common stock in lieu of cash for services, payments from collaborators and interest income.  The process of developing our product candidates will require significant additional research and development, preclinical testing and clinical trials, as well as regulatory approval. We expect these activities, together with general and administrative expenses, to result in substantial operating losses for the foreseeable future. We will not receive product revenue unless we, or our collaborative partners, complete clinical trials, obtain regulatory approval and successfully commercialize one or more of our products.  We cannot provide assurance that we will ever generate revenues or achieve and sustain profitability in the future or obtain the necessary working capital for our operations.
 
During the nine months ended September 30, 2016, our loss from operations was $11,821,162 and our net loss was $12,550,493. Net cash used in operating activities for the nine months ended September 30, 2016 was $9,622,309, and cash and cash equivalents as of September 30, 2016 were $6,941,213.  As of September 30, 2016, we had an accumulated deficit of $73,152,271.
 
We are subject to risks common to biopharmaceutical companies, including the need for capital, risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, enforcement of patent and proprietary rights, potential competition and retention of key employees. In order for a product to be commercialized, it will be necessary for us to conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and, in many cases, obtain adequate reimbursement from government and private insurers. We cannot provide assurance that we will ever generate revenues or achieve and sustain profitability in the future or obtain the necessary working capital for our operations.
 
 
-23-
 
 
RESULTS OF OPERATIONS
 
We are providing the following information about our revenues, expenses, cash and liquidity.
 
Comparison of the Three and Nine Months Ended September 30, 2016 and 2015
 
Revenues:
 
 
Three Months Ended
September 30,
 
 
%
Increase/
 
 
Nine Months Ended
September 30,
 
 
%
Increase/
 
 
 
2016
 
 
2015
 
 
(Decrease)
 
 
2016
 
 
2015
 
 
(Decrease)
 
Revenues
 $ 
 $133,318 
    (100%)
 $148,054 
 $509,474 
    (71%)
 
For the three months ended September 30, 2016, we recognized no revenues, as compared to $133,318 for the same period in the prior year. This decrease was primarily due to the completion of the current phase of our contract with the National Institutes of Health, or NIH (the “NIH Imaging Contract”), during the first quarter of the current year.
 
For the nine months ended September 30, 2016, we recognized revenues of $148,054, as compared to $509,474 for the same period in the prior year. This decrease was primarily due to the completion of the current phase of the NIH Imaging Contract during the first quarter of the current year.
 
Research and development expenses:
 
 
Three Months Ended
September 30,
 
 
%
Increase/
 
 
Nine Months Ended
September 30, 
 
 
%
Increase/
 
 
 
2016
 
 
2015
 
 
(Decrease)
 
 
2016
 
 
2015
 
 
(Decrease)
 
Research and development
 $1,671,181 
 $3,127,173 
    (47%)
 $4,967,695 
 $7,178,703 
    (31%)
 
For the three months ended September 30, 2016, we incurred research and development expenses of $1,671,181, as compared to $3,127,173 for the same period a year ago. Expenses for the current quarter in 2016 were primarily for our Phase I clinical trials of MVT-5873 as a therapeutic and MVT-2163 as a diagnostic for pancreatic cancer and other CA 19.9 malignancies, and in-house staffing to support preclinical and clinical development efforts in support of our programs.  Expenses in the same period a year ago were primarily for GMP manufacturing development of our lead antibody candidate HuMab 5B1, now designated as MVT-5873, at Patheon (f.k.a. Gallus BioPharmaceuticals). In addition, during the current quarter the Company negotiated a release of approximately $363,000 of previously accrued manufacturing costs related to failed manufacturing batches.
 
Stock-based compensation expense included in research and development expenses for the three months ended September 30, 2016 and 2015 was $301,985 and $307,892, respectively.
 
For the nine months ended September 30, 2016, we incurred research and development expenses of $4,967,695, as compared to $7,178,703 for the same period a year ago. Expenses for the first nine months in 2016 were primarily for our clinical trials, and in-house staffing to support preclinical and clinical development efforts in support of our programs.  Expenses in the same period a year ago were primarily for GMP manufacturing development of our lead antibody candidate HuMab 5B1 at Patheon (f.k.a. Gallus BioPharmaceuticals). In addition, during the current quarter the Company negotiated a release of approximately $363,000 of previously accrued manufacturing costs related to failed manufacturing batches.
 
Stock-based compensation expense included in research and development expenses for the nine months ended September 30, 2016 and 2015 was $889,666 and $633,593, respectively.
 
 
-24-
 
 
General and administrative expenses:
 
 
Three Months Ended
September 30,
 
 
 
%
Increase/
 
 
Nine Months Ended
September 30,
 
 
%
Increase/
 
 
 
2016
 
 
2015
 
 
 (Decrease)
 
 
2016
 
 
2015
 
 
(Decrease)
 
General and administrative
 $2,420,516 
 $2,286,315 
  6%
 $7,001,520 
 $7,473,416 
  (6%)
 
For the three months ended September 30, 2016, we incurred general and administrative expenses of $2,420,516, as compared to $2,286,315 for the same period a year ago. The increase in general and administrative expenses was primarily due to higher investor relations expenses of $369,555, higher facility operating costs of $140,020 and higher payroll related costs of $119,526. These increases were partially offset by lower stock-based compensation expenses of $520,375.
 
Stock-based compensation expense included in general and administrative expenses for the three months ended September 30, 2016 and 2015 was $666,556 and $1,186,931, respectively.  
 
For the nine months ended September 30, 2016, we incurred general and administrative expenses of $7,001,520, as compared to $7,473,416 for the same period a year ago. The decrease in general and administrative expenses was primarily due to lower stock-based compensation expenses of $237,316, lower investor relations expenses of $850,998 primarily related to stock issued for services in the same period last year, as well as lower consulting and business development expenses of $662,450 primarily related to stock issued for services in the same period last year.  These decreases were partially offset by increased facility operating costs of $407,493, professional fees related to consulting, audit and tax services of $195,589, and increased business development costs of $396,346.
 
Stock-based compensation expense included in general and administrative expenses for the nine months ended September 30, 2016 and 2015 was $2,570,326 and $2,333,010, respectively.  Stock-based compensation expense for the nine months ended September 30, 2016 included $592,329 in restricted stock for services.
 
Interest income and other income (expense):
 
 
Three Months Ended
September 30,
 
 
%
Increase/
 
 
Nine Months Ended
September 30,
 
 
%
Increase/
 
 
 
2016
 
 
2015
 
 
(Decrease)
 
 
2016
 
 
2015
 
 
(Decrease)
 
Interest and other expense, net
 $(266,051)
 $(84)
  *%
 $(729,332)
 $(269)
  *%
 
*Not meaningful
 
Interest expense, partially offset by other income, amounted to $266,051 and $84 for the quarters ended September 30, 2016 and 2015, respectively. The amount for the three months ended September 30, 2016, consisted primarily of $158,735 of interest expense related to interest on the Company’s term loan from Oxford Finance, LLC, $47,584 of financing cost amortization, and $59,738 of warrant amortization.
 
The amount for the nine months ended September 30, 2016, was $729,332, and consisted primarily of $443,175 interest expense related to interest on the Company’s term loan from Oxford Finance, LLC, $126,891 of financing cost amortization, and $159,302 of warrant amortization partially offset by interest income of $18.
 
The fair value of the warrants issued to Oxford Finance, LLC related to the term loan was recorded as a discount to the value of the note payable, and is amortized over the term of the loan.  In addition, financing costs incurred related to the term loan are amortized over the term of the loan.
 
 
-25-
 
 
Critical Accounting Policies and Significant Judgments and Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments related to our operating costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates under different assumptions or conditions.
 
Our critical accounting policies include:
 
Revenue recognition. Revenue from grants is based upon internal and subcontractor costs incurred that are specifically covered by the grant, including a facilities and administrative rate that provides funding for overhead expenses. NIH grants are recognized when we incur internal expenses that are specifically related to each grant, in clinical trials at the clinical trial sites, by subcontractors who manage the clinical trials, and provided the grant has been approved for payment. U.S. grant awards are based upon internal research and development costs incurred that are specifically covered by the grant, and revenues are recognized when we incur internal expenses that are related to the approved grant.
 
Any amounts received by us pursuant to the NIH grants prior to satisfying our revenue recognition criteria are recorded as deferred revenue.
 
Clinical trial expenses. We accrue clinical trial expenses based on work performed. In determining the amount to accrue, we rely on estimates of total costs incurred based on the enrollment of subjects, the completion of trials and other events defined in contracts. We follow this method because we believe reasonably dependable estimates of the costs applicable to various stages of a clinical trial can be made. However, the actual costs and timing of clinical trials are highly uncertain, subject to risks, and may change depending on a number of factors. Differences between the actual clinical trial costs and the estimated clinical trial costs that we have accrued in any prior period are recognized in the subsequent period in which the actual costs become known. Historically, these differences have not been material; however, material differences could occur in the future.
 
Stock-based compensation. Our stock-based compensation programs include grants of stock options and restricted stock to employees, non-employee directors and non-employee consultants. Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee, non-employee director or non-employee consultant’s requisite service period (generally the vesting period of the equity grant). 
 
We account for equity instruments, including stock options and restricted stock, issued to employees and non-employees in accordance with authoritative guidance for equity based payments. Stock options issued are accounted for at their estimated fair value determined using the Black-Scholes-Merton option-pricing model and restricted stock is accounted for using the grant date fair value of our common stock granted. The fair value of options and restricted stock granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. 
 
Warrant liability. We calculate the value of our warrant liability on a quarterly basis, or when other events and circumstances occur, using as a first step the Black-Scholes-Merton valuation model, taking into consideration the warrant exercise price, the probability of certain exercise price re-pricing scenarios, the market price for the common stock on the date of measurement, the risk-free interest rate, the dividend yield, the volatility of a comparable period in which the warrant may be exercised, and the remaining life of the warrant, and then as a second step we test our valuation for reasonableness based on settlement offers we have received from the holder of the warrant. If the settlement offer is within a reasonable period of time from when we do our calculation, and is not materially different from the value we recorded using the Black-Scholes-Merton model, then we retain the value established with our model. If the settlement offer were to reflect a materially different amount near the date of our calculation, then we would record the settlement offer. 
 
 
-26-
 
 
Income taxes. Significant judgment is required by management to determine our provision for income taxes, our deferred tax assets and liabilities, and the valuation allowance to record against our net deferred tax assets, which are based on complex and evolving tax regulations throughout the world. Our tax calculation is impacted by tax rates in the jurisdictions in which we are subject to tax and the relative amount of income earned in each jurisdiction. Our deferred tax assets and liabilities are determined using the enacted tax rates expected to be in effect for the years in which those tax assets are expected to be realized. 
 
The effect of an uncertain income tax position is recognized as the largest amount that is “more-likely-than-not” to be sustained under audit by the taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. 
 
The realization of our deferred tax assets is dependent upon our ability to generate sufficient future taxable income. We establish a valuation allowance when it is more-likely-than-not that the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available evidence, both positive and negative. As of December 31, 2015, the Company concluded that it was more-likely-than-not that its deferred tax assets would not be realized, and a full valuation allowance has been recorded.
 
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP.  See our audited consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K, which contain additional accounting policies and other disclosures required by GAAP.
 
LIQUIDITY AND CAPITAL RESOURCES
 
To date, we have funded our operations primarily through government grants, proceeds from the sale of common and preferred stock, the issuance of debt, the issuance of common stock in lieu of cash for services, payments from collaborators and interest income. We have experienced negative cash flow from operations each year since our inception. As of September 30, 2016, we had an accumulated deficit of $73,152,271. We expect to continue to incur increased expenses, resulting in losses, over at least the next several years due to, among other factors, our continuing and planned clinical trials and anticipated research and development activities. We had cash and cash equivalents of $6,941,213 as of September 30, 2016.
 
 
 
September 30,
2016
 
 
December 31,
2015
 
Cash and cash equivalents
 $6,941,213 
 $4,084,085 
Working capital
 $3,143,459 
 $350,621 
Current ratio
 
1.73:1
 
 
1.07:1
 
 
 
 
Nine Months Ended
September 30,
 
 
 
2016
 
 
2015
 
Cash provided by (used in):
 
 
 
Operating activities
 $(9,622,309)
 $(7,917,332)
Investing activities
 $(412,498)
 $(68,279)
Financing activities
 $12,891,935 
 $11,047,148 
 
 Sources and Uses of Net Cash for the Nine Months Ended September 30, 2016
 
Net cash used in operating activities was $9,622,309 for the nine-month period ended September 30, 2016, compared to $7,917,332 in the comparable period in 2015. The net cash used in both periods was primarily attributable to the net losses, adjusted to exclude certain non-cash items, primarily stock-based compensation and amortization of finance costs related to the term loan. Net cash used in operating activities for the nine months ended September 30, 2016 was also impacted by a decrease of $2,476,130 in accounts payable related primarily to research contract services and receipt of $757,562 in connection with government grants and government contracts.
 
 
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The net cash used in investing activities for the nine-month periods ended September 30, 2016 and 2015, amounted to $412,498 and $68,279, respectively, primarily as a result of purchase of lab equipment in the corresponding periods.
 
Net cash provided by financing activities was $12,891,935 for the nine months ended September 30, 2016, compared to $11,047,148 in the comparable period in 2015. Net cash provided by financing activities for the nine months ended September 30, 2016 was attributable to the net proceeds from the equity financing transaction completed in August 2016 and the term loan initiated during the first quarter of 2016. Net cash provided by financing activities for the nine months ended September 30, 2015 was attributable to the net proceeds from the sale of common stock and warrants in a private placement completed in April 2015.
 
Future Contractual Obligations
 
The Company had rental payment obligations under an operating lease that expired on July 31, 2015 related to its facility at 11588 Sorrento Valley Road. The Company continued to occupy those premises until February 4, 2016, and continued the lease on a month-to-month basis.
 
On September 2, 2015, the Company entered into a lease (the “Lease”) with AGP Sorrento Business Complex, L.P., for certain premises consisting of a total of approximately 14,971 square feet of office and laboratory space in buildings located at Suite 400, 11535 Sorrento Valley Rd., San Diego, California, to serve as the Company’s corporate offices and laboratories (the “New Premises”). Due to the fact that certain tenant improvements needed to be made to the New Premises before the Company could occupy the New Premises, the term of the Lease commenced on February 4, 2015. The Lease terminates six years after such term commencement date, unless earlier terminated in accordance with the Lease. Pursuant to the terms of the Lease, the monthly base rent is $35,631, subject to annual increases as set forth in the Lease.
 
The Company has an option to extend the Lease term for a single, five-year period. If the Lease term is extended for the optional five-year period, the monthly base rent will be adjusted based on fair market rental value. In addition to rent, the Company agreed to pay a portion of the taxes and utility, maintenance and other operating costs paid or accrued in connection with the ownership and operation of the property.
 
Our master lease and sublease of our facility located at the Porter Drive Facility were terminated on February 28, 2013 and we entered into a termination agreement with the landlord on February 19, 2013 to voluntarily surrender its premises. As a result of the termination agreement, we were relieved of further obligations under the master lease and further rights to rental income under the sublease and paid a termination fee of approximately $700,000. In addition to the termination fee, an additional termination fee of $590,504 is due to the landlord following the Company’s receipt of $15 million or more in additional financing, in the aggregate, which was achieved on August 22 ,2016.
 
We anticipate that we will continue to incur substantial net losses into the foreseeable future as we: (i) continue our Phase I clinical trial for our stand-alone therapeutic HuMab 5b-1, or MVT-5873, which was initiated in the first quarter of 2016, (ii) initiate our Phase I clinical trial of our PET imaging agent 89Zr-HuMab-5B1, or MVT-2163, (iii) continue to conduct preclinical development activities related to other product development candidates in our library, and (iv) monitor patients in clinical trials that have already completed their treatment regimens. Based on management’s assumptions for continuing to develop its existing pipeline of products without additional funding, we expect we will have sufficient funds to meet our obligations through May 2017.
 
We plan to continue to fund our research and development and operating activities through public or private equity financings, debt financings, strategic partnerships or other arrangements with organizations that have capabilities and/or products that are complementary to our own capabilities and/or products, licensing arrangements, government grants, or other arrangements. However, we cannot be sure that such additional funds will be available on reasonable terms, or at all. If we are unable to secure adequate additional funding, we may be forced to reduce spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. In addition, if we do not meet our payment obligations to third parties as they come due, we may be subject to litigation claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management. Any of these actions could materially harm our business, results of operations, and future prospects.

 
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If we raise additional funds by issuing equity securities, substantial dilution to our existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.
 
Recent Accounting Pronouncements
 
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)."  This update will increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged, and it simplified the accounting for sale and leaseback transactions. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of assessing what impact this new standard may have on our consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payment transactions including accounting for excess tax benefits and tax deficiencies, classification of excess tax benefits in the statement of cash flows and accounting for award forfeitures. This update is effective for annual and interim reporting periods of public entities beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the impact of ASU 2016-09 on its consolidated financial statements.
 
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.
 
Off-Balance Sheet Arrangements
 
We have no material off-balance sheet arrangements.
 
Item 3.          Quantitative and Qualitative Disclosures About Market Risk.
 
Not applicable.
 
Item 4.          Controls and Procedures.
 
Disclosure Controls and Procedures
 
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures (as defined in such rules) as of the end of the period covered by this report. The Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2016.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
 
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Changes in Internal Control over Financial Reporting
 
As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, our principal executive officer and principal financial officer concluded there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that could significantly affect internal controls over financial reporting as of September 30, 2016.
 
PART II. OTHER INFORMATION
 
Item 1.          Legal Proceedings.
 
None.
 
Item 1A.       Risk Factors.
 
Other than as set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, there have been no material changes to the Risk Factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.
 
Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds.
 
Series D Conversions
 
During the quarter ended September 30, 2016, holders of Series D preferred stock converted 40,799 shares of Series D preferred stock into 551,339 shares of common stock.
 
The securities referenced above were issued in reliance on the exemption from registration afford by Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.
 
Item 3.          Defaults Upon Senior Securities.
 
None.
 
Item 4.          Mine Safety Disclosures.
 
None.
 
Item 5.          Other Information.
 
None.
 
 
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Item 6.          Exhibits.
 
EXHIBIT INDEX
 
Exhibits
 
Exhibit No.
 
Description
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101
Interactive data file
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
Date: November 7, 2016
MABVAX THERAPEUTICS HOLDINGS, INC.
 
 
 
 
By:
/s/ J. David Hansen
 
 
J. David Hansen
 
 
President and Chief Executive Officer (Principal Executive Officer authorized to sign on behalf of the registrant)
 
 
 
 
 
 
 
 
By:
/s/ Gregory P. Hanson
 
 
Gregory P. Hanson
 
 
Chief Financial Officer (Principal Financial and Accounting Officer authorized to sign on behalf of the registrant)
 
 
 
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